'Outsourcing' - What a Non-Crisis That Turned Out to Be

In the 2001-03 economic downturn, the aftermath of the technology bust resulted in hundreds of thousands of software engineers and assorted high-tech workers losing their jobs. A jittery public was vulnerable to influence from isolationist politicians, with the likes of Lou Dobbs and Pat Buchanan fanning the flames in the media. As a result, the simple business practice of moving certain components of daily operations to a lower-cost location, if only to keep up with competitors already doing the same, became a dirty word - 'outsourcing'.

The cover story of Wired Magazine's February 2004 issue was on the outsourcing of software jobs to India. Within the article, a core theme was the supposedly tremendous hardships that white-collar Americans were about to experience due to a 'giant sucking sound' of jobs going to India. In the same month, then Presidential candidate John Kerry screamed about the practicies of "Benedict Arnold CEOs" who outsource American jobs to India, hoping to gain the support of isolationists and the economically ignorant. Elsewhere, very uncharitable things were said by leftists about brown-skinned Indians, due to their rapid adoption of capitalism and globalization at the expense of the leftist plantation where Indians were required to symbolize Gandhian non-violence, zen spirituality, yoga, curries, and the glorification of poverty.

Let's call February 2004 as time when fears of 'outsourcing' reached a fevered peak.

So 5.4 million jobs were created in this short time, the unemployment rate is lower than it has been for 32 of the last 35 years, and wages have risen while real GDP has grown at a 3.5% clip. That has been the extent of the damage to the US economy. Take that, Lou Dobbs, Pat Buchanan, John Kerry, Dennis Kucinich, and other assorted demagogues, who have no ability whatsoever to truly grasp the trends that shape our world.

What does the future of outsourcing hold? Is there still a risk of jobs vanishing from the US at a rate faster than they can be produced, as pessimists still maintain? Unlikely, even though Internet backbone bandwidth has quadrupled in the last 3 years, and many more people in India have PCs and Broadband connections today than in 2003. This is because aggregate demand growth has saturated even India's vast labor pool. Salaries in India have been rising at over 12% a year due to labor shortages, causing their cost advantage to erode. India itself has started outsourcing to Bangladesh and Eastern Europe, which are much smaller labor pools and will also saturate quickly. If anything, the trends favor more job creation in America and India.

The next time there is a recession, this could emerge as a phony issue again. But other than a few pessimists, socialists, and racists, it is unlikely to gain much traction, as Americans have seen that the benefits have outweighed the costs by a handsome margin.

Comments

Here in the UK many companies have reversed the outsourcing due to the awful standards of the Indian companies used.
Many banks & insurance firms use this in their advertising; this isn't racism but simply an acknowledgement that you get what you pay for & the language skills of many aren't of a sufficient standard to deal with the myriad of consumers that call.
The same has happened in software development, in which I work.
Laudably India is prospering from it's native initiative & entrepreneurialism; much better than relying on the West.

It's interesting that you point out that labor costs have increased at 12% a year in India. When this issue was hyped a few years ago, I was assuming that the law of comparative advantage would remain in India's favor due to her large population. I didn't realize the educated labor pool was that small in comparison to the general population. The media seemed to portray the opposite.

The number of college-educated people in India is large, (2 million new college graduates a year, of which 600,000 are engineering, science, or accounting) but the demand is even larger.

Note first that outsourcing to India is not only from the US but also from Western Europe, Japan, Canada, and Australia. All that in aggregate is a very full plate.

Secondly, consider that when people say "companies can lay off an $80,000 engineer in the US and hire a $15,000 engineer in India", they fail to consider that the same Indian engineer could also come to the US and get an $80,000 job (as thousands do every year). Why should he settle for only $15,000? You must have noticed that the number of Indians under the age of 30 running around in the US seems a lot higher than 10 years ago.

Third, also consider the high domestic growth in India that is creating many jobs. This also draws away workers from the outsourcing labor pool. Of the 20 largest economies in the world, it is the second-fastest growing, and would be first if China allowed its currency to float freely like India does.

A downside of offshoring is the potential for America to drive off into a ditch. Young people are choosing careers that aren't offshorable. They avoid unskilled labor and professional jobs that aren't hands on! They want high skilled jobs that require a physical presence to interact with a person or machine. Young folks could flock away from what is being offshored...then the US loses capacity in that profession in general.

I'm not predicting that will happen, it's just a possible "unintended consequence."

Our labor markets are so tight. We need to maximize our existing human capital to its full potential and import more. I'd rather import an Indian, Chinese, Russian, or Eastern European engineer or scientist or software programmer than to offshore to them. Let's have the giant sucking sound be the USA sucking global talent here.

A total failure of US immigration policy is that the *least* skilled people from Mexico - not even educated Mexicans - can easily come here by the millions without adhering to any laws or processes, while people like Tushar have to literally wait for years just to get a greencard, and 5 more years to become a citizen.

America should be actively finding ways to bring more Tushars over here (ideally at least 300,000) and make it easy for them to stay and switch employers based on market forces, while simultaneously preventing the least-skilled people from Mexico from coming here and diluting the educational level of the workforce.

The greatest gift that the selcaur West has given to posterity is the world’s first universal language – science! Also a culture of free, sceptical inquiry and open political discourse and accountable governance. The English language too. Indians have grasped it all with both hands. I’m English and I’m absolutely delighted and wish them all the very best! Sorry you’re dropping our accent.